Citadel taking a risky gamble on subprime assets with E*Trade
When one looks at the situation in subprime markets,
one is reminded of a famous one liner by popular Hollywood actor, Will Smith, in the movie Hitch, when he says, “Basic principles? There aren’t any.” Months after all the subprime mayhem has been unleashed, the casualties are still being counted. And one would feel that the markets would be keen on behaving rationally for a while. But then, if that’s what you think, what would you make of Citadel Investment Corporation’s whopping cash infusion of $2.55 billion in a subprime tainted E*Trade Financial Corporation? And other similar big ticket infusions in Citigroup, Merrill Lynch & northern rock, among others?
The E*Trade deal has been sealed with the purchase of $1.75 billion of 10-year notes yielding 12.5%, and buying E*Trade’s $3 billion of asset backed securities for $800 million. It has increased Citadel stake up from 3% to just below 20% in E*Trade. E*Trade will get $2.4 billion in cash immediately. Out of this, $1.6 billion will be the price of E*Trade’s stock and senior unsecured notes.
So what’s the catch? Leading its ship into troubled waters is not new for Citadel, it earlier proved a saviour for distressed hedge funds Amaranth Advisers & Sowood. Opines Dr. Paul S. Kedrosky, Executive Director, William J. von Liebig Center in San Diego, “It’s not that big of an investment for Citadel considering its assets and access to capital.” Avers Robert Ellis, Senior Analyst, Celent, a global consultancy, “The bet is that Citadel was able to get much better terms after write-off of much of banking side’s loan portfolio, including almost their entire mortgage portfolio.” He estimates that there is considerable potential left in US online broking, where E*Trade is still one of the key players. Moreover, as Dr. Kedrosky comments, “They hope they’ll make money via control and eventual resale of over-discounted mortgage assets.” As we said, no basic principles at work in the markets!
When one looks at the situation in subprime markets,
one is reminded of a famous one liner by popular Hollywood actor, Will Smith, in the movie Hitch, when he says, “Basic principles? There aren’t any.” Months after all the subprime mayhem has been unleashed, the casualties are still being counted. And one would feel that the markets would be keen on behaving rationally for a while. But then, if that’s what you think, what would you make of Citadel Investment Corporation’s whopping cash infusion of $2.55 billion in a subprime tainted E*Trade Financial Corporation? And other similar big ticket infusions in Citigroup, Merrill Lynch & northern rock, among others?The E*Trade deal has been sealed with the purchase of $1.75 billion of 10-year notes yielding 12.5%, and buying E*Trade’s $3 billion of asset backed securities for $800 million. It has increased Citadel stake up from 3% to just below 20% in E*Trade. E*Trade will get $2.4 billion in cash immediately. Out of this, $1.6 billion will be the price of E*Trade’s stock and senior unsecured notes.
So what’s the catch? Leading its ship into troubled waters is not new for Citadel, it earlier proved a saviour for distressed hedge funds Amaranth Advisers & Sowood. Opines Dr. Paul S. Kedrosky, Executive Director, William J. von Liebig Center in San Diego, “It’s not that big of an investment for Citadel considering its assets and access to capital.” Avers Robert Ellis, Senior Analyst, Celent, a global consultancy, “The bet is that Citadel was able to get much better terms after write-off of much of banking side’s loan portfolio, including almost their entire mortgage portfolio.” He estimates that there is considerable potential left in US online broking, where E*Trade is still one of the key players. Moreover, as Dr. Kedrosky comments, “They hope they’ll make money via control and eventual resale of over-discounted mortgage assets.” As we said, no basic principles at work in the markets!
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